Britannia: A Proprietary Form Owned by Tom

1. Bats will be purchased at 150. The purchase price will increase to 170 at the end of 5 year

2. Transportation from the warehouse to the retail store will incurred by Tom. This will keep increasing till the end of fifth year

3. Approximately we assume that 1 salesman will sell 250-300 bats in a year. So with this assumption we employ 25 salesman in the 1^st year which keeps increasing in the coming year and becomes 45 in the end of the 5^th year

4. The plastic bags in which the bats will be packed will be directly purchased by the supplier and the salesman will pack them and will sell to the retail customer

5. Machine will be purchased in the beginning of the year

6. This machine will be used for packing the bats

7. The life of the machine is 5 years

8. The machine does not have any salvage value

9. The machine is depreciated equally throughout the 5 years

Stock

1. There is no opening stock

2. Tom does not return the old stock to the supplier

3. The stock is valued at average cost of all 5 years

Sales to debtors

1. 80% sales is cash sales

2. The remaining 20% is credit sales

3. The sales occur evenly throughout the year

4. There is no fixed percentage regarding the amount receivable from debtors. It varies from year to year

Cash Budget

1. The firm takes a loan of 1100000 from bank. This loan is long term. The rate of interest is 3.6%.

2. The company does not repay any principal amount throughout the 5years

3. Sales occur evenly throughout the year

4. All borrowing occurs at the beginning of the year, and all repayments occur at the end of the year.

5. The company does not have to make any payments until the end of the year.

6. No cash dividends are paid during the next five years

Budgets

1. Sales Quantity Budget

Quantity Purchase
Year	Opening Stock	Purchase	Sale Units	Closing Stock
1	0	30000	25000	5000
2	5000	30000	28000	7000
3	7000	35000	37500	4500
4	4500	40000	41000	3500
5	3500	42000	43000	2500

 

Year	Selling Price	Purchase Price
1	200	150
2	210	155
3	220	159
4	235	162
5	239	170

 

Sale Value and Purchase Price
Year	Sales	Purchase
1	5000000	4500000
2	5880000	4650000
3	8250000	5565000
4	9635000	6480000
5	10277000	7140000

2. Transportation cost

Transportation Cost Budget
Year	Cost
1	300000
2	320000
3	350000
4	370000
5	450000

3. Labour Budget

Salary
Year	No. Of labours	Salary/lab/p.a.
1	25	3000	75000
2	30	3100	93000
3	35	3200	112000
4	40	3300	132000
5	45	3350	150750

4. Packing cost Budget

Packing Material
Year	Cost per packet	No. of Packets sold	Packing Cost
1	15	25000	375000
2	15.5	28000	434000
3	16	37500	600000
4	17	41000	697000
5	17.5	43000	752500

5. Depreciation Budget

Depreciation of machine
Year	Dep
1	100000
2	100000
3	100000
4	100000
5	100000

 

Profit and Loss Statement(Marginal Costing Method)
	Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
	No. Of Units	25000.00	28000.00	37500.00	41000.00	43000.00
	Selling Price	200.00	210.00	220.00	235.00	239.00
	Sales Value	5000000.00	5880000.00	8250000.00	9635000.00	10277000.00
Less	Purchase	4500000.00	4650000.00	5565000.00	6480000.00	7140000.00
	Transportation	300000.00	320000.00	350000.00	370000.00	450000.00
	Packing	375000.00	434000.00	600000.00	697000.00	752500.00
	Contribution	-175000.00	476000.00	1735000.00	2088000.00	1934500.00
Less	Fixed Cost
	Depreciation	100000.00	100000.00	100000.00	100000.00	100000.00
	Warehouse Rent	1200000.00	1200000.00	1300000.00	1300000.00	1400000.00
	Salary	75000.00	93000.00	112000.00	132000.00	150750.00
	Interest	40000.00	40000.00	40000.00	40000.00	40000.00
	Profit	-1590000.00	-957000.00	183000.00	516000.00	243750.00

Cash Flow Statement
Year	1	2	3	4	5
Opening Balance of Cash	0	10000	39500	37500	406500
Receipt
Total Sales	5000000	5880000	8250000	9635000	10277000
Cash Sales	4000000	4704000	6600000	7708000	8221600
Cash collected from debtors	800000	1000000	1500000	1800000	2500000
	4800000	5714000	8139500	9545500	11128100
Payment
Purchase	4500000	4650000	5565000	6480000	7140000
Paid To Creditors for Purchase	3900000	3487500	5600000	6500000	7000000
Transportation	300000	320000	350000	370000	450000
Packing cost	375000	434000	600000	697000	752500
Machine		100000	100000	100000	100000
Interest	40000	40000	40000	40000	40000
Rent of Warehouse	1200000	1200000	1300000	1300000	1400000
Salary	75000	93000	112000	132000	150750
	5890000	5674500	8102000	9139000	9893250
Bank Loan	1100000
Closing Cash Balance	10000	39500	37500	406500	1234850

 

Debtors
Year	Opening Balance	Sales	Receipt	Closing Balance
1	0	1000000	800000	200000
2	200000	1176000	1000000	376000
3	376000	1650000	1500000	526000
4	526000	1927000	1800000	653000
5	653000	2055400	2500000	208400

 

Creditors
Year	Opening Balance	Purchase	Paid	Closing Balance
1	0	4500000	3900000	600000
2	600000	4650000	4987500	262500
3	262500	5565000	5600000	227500
4	227500	6480000	6500000	207500
5	207500	7140000	7000000	347500

Balance Sheet

	Liabilities	Year 1	Year 2	Year 3	Year 4	Year 5
	Capital	796000	-794000	67400	-147600	209200
Add/Less	Profit/(Loss)	-1590000	-957000	183000	516000	243750
Add:	Capital Intro/Withdrawal		1818400	-398000	-159200	-159200
	Net Worth	-794000	67400	-147600	209200	293750
	Creditors
	Purchase	600000	262500	227500	207500	347500
	Machine	500000	400000	300000	200000	100000
	Bank Loan	1100000	1100000	1100000	1100000	1100000
		1406000	1829900	1479900	1716700	1841250
	Assets
	Packing Machine	500000	400000	300000	200000	100000
Less	Depreciation:	100000	100000	100000	100000	100000
		400000	300000	200000	100000	0
	Debtors	200000	376000	526000	653000	208400
	Cash	10000	39500	37500	406500	1234850
	Stock	796000	1114400	716400	557200	398000
		1406000	1829900	1479900	1716700	1841250

 

Ratio Analysis

Profitability ratio

These ratios help us to measure the ability of a particular entity to generate income when these are compared to expenses & all other costs that are incurred by the entity for a specific period of time. For all these ratios the success depends on increasing them as compared to previous year’s results or comparing the same with competitor’s results. In case if the result is positive than it means that the company is doing well. There are different types of profitability ratios such as Net Profit Ratio, Gross Profit Ratio, Return on Equity ratio Return on assets ratio, etc. One should consider certain aspects when the entity in which he is investing is having a business which is seasonal in nature. In such case the major part of the income is derived in very few months say 2-3 months.

Let us calculate the Gross Profit ratio of Britannia

Gross profit is a yard stick that can be used to measure the financial viability of a firm. It reveals the amount of excess receipts that remain after deducting the cost of goods sold. From this remaining part i.e. Gross Profit, the expense that are charged to profit & loss account are paid.

This is not a true estimate of company’s financial viability. In the absence of gross profit an organization will not be able to pay operating, selling, administrative and other expenses. It can’t even plan savings for future years by transferring them into reserves.

This ratio should remain stable in all the years. An increase in this ratio is not easy to make. It requires drastic changes that can affect the cost of goods sold or pricing policies of the company.

 The formula for calculating the gross profit ratio is

Gross profit/Net Sales * 100

Gross Profit	Gross Profit %
500000	10
12,30,000	21
26,85,000	33
31,55,000	33
31,37,000	31

The gross profit has been continuously increasing. In the first and the second year the company has suffered loss. The firm is new to the business. It is obvious that it may earn loss. The heavy investment in the first year and low sales has bought very less revenue to the firm. But from the 3^rd year Britannia has started earning profit and is growing as it has not remained new to the business.

Net Profit

Net Profit	Net Profit %
-1590000	-31.80
-957000	-16.28
183000	2.22
516000	5.36
243750	2.37

Net Profit Ratio               

It is basically a ratio that measures how much part or portion of every dollar a company actually retains in earnings. It is very useful while we compare two companies in similar industries. Higher percentage of this ratio indicates that company has a better control over its cost as when compared to its competitors.

Shareholders have a close watch over this ratio. Changes in this ratio are endlessly scrutinized. This ratio shows the relationship between Net profit after tax & Net Sales. Net profit is calculated by deducting all expenses except dividends to shareholders. (Bizfinance, 2014). Net Profit Ratio= Net Profit/Net Sales *100

Net Profit	Net Profit %
-1590000	-31.80
-957000	-16.28
183000	2.22
516000	5.36
243750	2.37

We can see from our analysis that in the 1^st two years of operation Britannia is incurring losses. But then onwards it has started earning profits. Profits have fallen during the 5^th year. This is due to the increase in the warehouse rent and salary.

Short Term Solvency Ratios          

This ratios help to evaluate the ability of a company to clear its debts & other obligations. It analyses whether a company is able to meet its short term obligations & current liabilities as & when demanded from the creditors. The lower the ratio the more the chances that the company will default. This ratio is used majorly in insurance companies.

This help to know that the company will remain solvent or there are certain indications that shows that the company may become insolvent in near future. It measures only cash flows & not income. The majorly used short term solvency ratio is Current ratio which is explained & calculated as follows.

Current Ratio

Basically it is a ratio that measures a company’s liquidity i.e. its ability to pay short term obligation when they arise. It is the most widely used test of liquidity of a business. It is the ratio of Current Assets of a business to its Current Liabilities. Current Assets are those which are converted into cash within 12months or within the normal operating cycle whereas Current liabilities are the obligations of a business that have to be paid within 12months. An idle Current Ratio is 2:1 which means Current Liabilities are half of Current Assets.

Creditors prefer granting credit to those companies which have a higher Current Ratio as they will feel safe. The formula for this ratio is Current Assets divided by Current Liabilities. It is also known as Liquidity Ratio, cash asset ratio or cash ratio. When the current liabilities are more than the current assets then the company may face problem in discharging its short term liabilities & obligations. (Accounting Explained, 2014).

When the ratio is less than 1 then the company is facing financial crisis, but that does not mean that company will become bankrupt.

Current Assets	1006000	1529900	1279900	1616700	1841250
Current Liabilities	600000	262500	227500	207500	347500
Current Ratio	1.68	5.83	5.63	7.79	5.30

As we have mentioned above the optimum current ratio should be minimum 2:1 which means the current assets should be twice as current liabilities. The CR of Britannia is increasing year by year. This is due to huge credit sales and huge credit purchase. Except in the year 4 the ratio is between 5-6. This indicates that the firm has excessive cash balance which should be invested in government securities and other profitable investments. It can invest the excess cash in its own business by providing huge credit to creditors.

Efficiency Ratio

The word efficiency means optimal utilization of resources. This ratio is used to analyze how a company uses its assets & liabilities internally. The most widely used ratios are Accounts receivable ratio, Fixed Assets turnover ratio, stock turnover ratio, sales to net working capital ratio& sales to inventory ratios.

The ratios are calculated for Britannia is as follows

Fixed assets turnover ratio: The Company uses fixed assets to produce goods & services. The company should have a regular check on the utilization of fixed assets. The basic purpose of fixed assets is to fixed assets like land, building, machinery, etc. is to produce goods & services that earn income to the company. This ratio measures the capability of the company to generate sales by utilizing the fixed assets. The fixed assets used should be net of depreciation. This ratio is more often used in manufacturing industries where any fixed asset is purchased to increase the production. This ratio shows how efficiently the investment in fixed assets is utilized. The ratio of Britannia is calculated as follows

Fixed Assets	400000	300000	200000	100000
Turnover	5000000	5880000	8250000	9635000
Ratio	12.5	19.6	41.25	96.35

The company does not have much of the fixed assets in its pocket. The warehouse and retail outlets are rented by the firm. It owns just the packing machine. The cost of machine depreciates every year so we can find this ratio becoming favourable year by year. In the 5^th year the ratio is 96.35 which means the assets is utilized in such a way that it yields 96.35 times more than its actual worth.

Conclusion

The above ratios especially the gross profit ratio proves that the firm has a bright future. In the beginning it suffered huge loss but it recovered the same in the coming 3 years. Thus based on our analysis shown above we conclude that the firm will continue to earn profit in future. There are certain assumptions based on which I have done the analysis. In case if any assumption fails than it will distort the predictions done for financial statements.

 

References

Accounting explained, 2014 “Current ratio”, viewed on 29^th January 2015 <https://accountingexplained.com/financial/ratios/current-ratio >

Bizfinance, 2014 “Profitability ratio Analysis”, viewed on 29^th January 2015 <https://bizfinance.about.com/od/financialratios/a/Profitability_Ratios.htm>

John G. Finley, Simpson Thacher & Bartlett LLP, 2010, “Delaware Provides Guidance Regarding Discounted Cash Flow Analysis”, Viewed on 29^th January 2015

<https://blogs.law.harvard.edu/corpgov/2010/07/16/delaware-provides-guidance-regarding-discounted-cash-flow-analysis/